Is Wine Different from Other Consumer Products?

Valette highlights economics and consumer engagement at UC Davis lecture

by Ted Rieger
wine winery Vinfolio
Vinfolio chairman Jean-Michel Valette focused on economics and consumer engagement during his lecture at the UC Davis Robert Mondavi Institute. Photo: Ted Rieger

Davis, Calif.—Wine business executive Jean-Michel Valette has often heard people say “wine is different” from other consumer products, and he has wrestled with this notion throughout his career. Speaking Nov. 17 at the University of California, Davis, Valette acknowledged some differences in selling wine compared with other products, but he emphasized paying attention to basic economic and business factors to operate a successful company.

Valette’s lecture, “Vinous Exceptionalism...Is Wine Really Different: A View from Other Parts of the Consumer World,” was part of the Walt Klenz Lectureship Series sponsored by Treasury Wine Estates and named in honor of former Beringer Blass CEO Walt Klenz.

Background and experience
Valette has an impressive academic and professional resume. He earned undergraduate degrees in economics and German literature from Stanford University and holds a master’s degree in engineering economic systems from the same school. He later earned an MBA from Harvard Business School. He became a Master of Wine in 1992 and served as the first U.S. chairman of the Institute of Masters of Wine. He has served in executive positions for Robert Mondavi Winery and for Franciscan Estates in Napa Valley. He is currently chairman of Vinfolio, a San Francisco-based seller of fine wines for collectors and enthusiasts using a direct-to-consumer e-commerce platform. He is also lead director of The Boston Beer Co. (makers of Samuel Adams).

His experience includes chairman and board positions at consumer product companies that include Peet’s Coffee & Tea and Select Comfort (Sleep Number beds). Valette joked: “I have a short attention span. My career has involved a lot of different industries.”

He worked at investment bank Hambrecht & Quist in San Francisco in the 1990s and helped Beringer Wine Estates become a publicly traded company in 1997. From his experience making decisions whether or not to lend people money, he said, “For me it’s important to understand the economic indicators of success.”

Discussing factors that differentiate wine from other consumer products, he said wine has many brands and labels, it’s produced from many regions and varieties, and unlike other products it’s sold based on vintage. Wine commonly employs stories for marketing, and it’s sold at a much wider range of price points than other products. Wine has a complex distribution system, and it is asset intensive. He acknowledged that not all of these differences are good, and some are confusing for consumers.

He cited two key things that are not different about wine: It’s bought and consumed by the same consumers who buy other products, and the basic laws of economics are the same for wine as for other consumer products. Valette asked, “Are winemakers and producers paying enough attention to the things that are the same for everybody in terms of economics?”

Valette displayed formulas he uses for two important economic principles common for all companies: profitability and cash flow. Factors that determine profitability are sales volume, product price, cost of goods sold, and assets. Looking at the formula, he said, “This helps me think about how the action I take in one place affects all the other factors and overall profitability.”

Cash flow, or working capital, is equal to inventory plus receivables minus payables. One problem in the wine industry is that wine spends a long time in inventory compared with most products, due to long production and aging timelines, that negatively affect cash flow. Valette observed, “Bordeaux figured out a way around this by selling futures.”

Three key concepts
Valette listed three concepts that have helped him professionally that apply to all consumer products.

Concept No. 1: The basic brand-building objective is the same for all products when it comes to building a consumer base and sales. It involves: Awareness, Trial and Repeat Purchase. Getting consumers to make repeat purchases can be the biggest challenge.

Concept No. 2: Brand strength can be measured. It is a function of both product sales volume and product price. Successful companies can continue to increase price over time, even with increases in production and sales volume. Strong brands often have a narrower, more focused product line, and they have demonstrated consistency over time. Examples include Opus One, Rombauer Chardonnay, Silver Oak and Sonoma-Cutrer.

Concept No. 3: Distribution is key. “If you can’t get it to the customers, you don’t have a business,” he said. In the wine business, getting product to people is hard to do because of regulatory issues, the three-tier system, and the trend toward more brands and fewer distributors. Although distribution strength is often correlated with brand strength, Valette said, “Just because you have a good brand does not mean you’ll get distribution. Successful companies find a way to get distribution.”  This may be through innovative partnerships or targeting more specific markets.

Engaging consumers
Discussing changes and new trends over the course of his career, Valette observed, “Consumers today are much more engaged with the products they buy. People care about how and where their stuff is made.” When evaluating new products, people look at reviews online and the reviews are not necessarily by famous people or authorities.

Discussing some of the “new realities,” Valette said, “Value is much more critical than ever, and people need a real reason to spend money.” Younger people are much more interested in paying for experiences than for material goods. Consumers don’t care about the economics of your company or your industry, whether or not you make money, or the complexities of the distribution system. However, the consumer does care about your story, which is one area in which the wine industry has an advantage, because storytelling has been associated with wine for hundreds of years. Storytelling has more recently become a bigger strategy for beer and coffee companies.

But as Valette pointed out, who tells the story has changed. It used to be a magazine, a critic or sommelier. Now a consumer can take a picture of a wine list or wine bottle and find out electronically what other people say about the wines. How and where the story is told has changed. The winery tasting room was a good place to tell the story, but now every winery has a tasting room and there are many more tasting rooms. How the story is repeated has changed, with electronic and social media now replacing other forms of communication.

E-commerce and e-engagement is much more critical today. “You can’t be a consumer brand of any kind today and not expect your customers to want to interact with you,” he said. Valette summarized his advice for the audience of current and future wine and food professionals: Tell your story. Is anybody hearing it? Is anybody repeating it?

The Walt-Klenz Lectureship Series is presented by the Robert Mondavi Institute and the Department of Viticulture and Enology to feature wine business leaders who share insights and experiences with students, faculty and industry attendees.


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